A contractor purchases equipment for $120,000 with an estimated useful life of 8 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
B) $15,000
Straight-line depreciation divides the cost evenly over the useful life. $120,000 ÷ 8 years = $15,000 per year. Since there's no salvage value, the full cost is depreciated.
Why This Is the Correct Answer
Option B is correct because straight-line depreciation calculates annual depreciation by dividing the total depreciable cost by the useful life in years. With equipment costing $120,000, no salvage value, and an 8-year useful life, the calculation is straightforward: $120,000 ÷ 8 = $15,000 per year. This method spreads the cost evenly across all years of the asset's useful life.
Why the Other Options Are Wrong
Option A: $20,000
This answer of $12,000 would result from incorrectly dividing $120,000 by 10 years instead of the given 8-year useful life, showing a calculation error.
Option C: $12,000
This answer of $20,000 would result from dividing $120,000 by 6 years instead of the correct 8-year useful life specified in the problem.
Option D: $18,000
This answer of $18,000 appears to come from dividing $120,000 by approximately 6.67 years, which doesn't match the given 8-year useful life.
Memory Technique
Remember 'SLD' - Straight Line = Divide. Simply divide the net cost (cost minus salvage) by the years of useful life for equal annual amounts.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting or business management section of your reference materials.
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